Wednesday, July 13, 2005

The Oil Uproar That Isn't

When oil prices spiked in the early 1980's after the Iranian revolution, Jared Nedzel gave up his 1978 Pontiac Trans Am, an emblematic American muscle car, for a smaller, less extravagant Toyota Corolla. He was on his way to Cornell University to study civil engineering and he needed a more economical car.

Today, Mr. Nedzel, a 44-year-old software developer who lives near Boston, owns a Toyota 4Runner, a sport utility vehicle he bought two years ago. It gets about 17.5 miles per gallon, as much as the Trans Am did, and he uses it for his 45-minute commute to work and for driving near the beaches of Martha's Vineyard to get to his favorite fishing spots.

Gasoline prices have spiked again, to more than $2.25 for a gallon of regular in Boston last week, just above the national average, according to the AAA. But energy costs do not weigh on Mr. Nedzel's mind. "Just another gas crisis," he said, expressing an opinion held by many others. "I'm not hyperventilating about it."

For Americans, oil shocks no longer seem so shocking.

The Arab oil embargo of 1973 and the Iranian revolution in 1978-79 exposed America's vulnerability to powerful forces outside its control, forces that sent fuel prices to record levels, prompted anger over gas lines and led to bookend recessions that defined a decade of economic turmoil.

By 1980, the energy crisis and the inflation it spawned had left Americans in a vindictive mood, contributing to the re-election defeat of President Jimmy Carter, who had promised to wage the "moral equivalent of war" against dependence on foreign oil.

But the latest escalation in oil prices - to as much as $60 today from less than $30 a barrel a little more than two years ago - has produced a much more limited response. Energy legislation that President Bush is pressing Congress to pass this summer would bring little relief. And while Americans say in polls that they are deeply disturbed by high gasoline prices and looking for someone to blame, most people continue to drive just as avidly as before; purchases of gas-guzzling sport utility vehicles have slowed but there has been no significant shift to more fuel-efficient cars.

Furthermore, gasoline consumption has continued to rise, up 1 percent in May compared with the same month last year.

James R. Schlesinger, whom President Carter selected as the first energy secretary, in 1977, said in a recent interview that the country's basic energy approach can best be summed up this way: "We have only two modes - complacency and panic."

The earlier oil shocks produced remarkable changes, including the rise of the Japanese auto industry as Americans turned to smaller, more efficient cars out of choice and necessity. With carrots and sticks, the United States managed to cut, temporarily, energy use per person and to scale back the share of oil in its overall energy mix.

The federal government established a strategic petroleum reserve as an insurance policy against global supply disruptions, set a national 55 m.p.h. speed limit and spent billions - much of it wasted, however, on alternatives like shale oil that proved far too costly, particularly after crude oil prices fell when economic recession tempered the demand for energy.

But this time around, the government has done almost nothing to reduce the nation's vulnerability to a sudden interruption in oil supplies. Even the advocates for the long-stalled energy bill that has finally passed both houses of Congress - though in radically different forms - acknowledge that neither version of the measure will be effective.

This month, the House and the Senate will attempt to hammer out their differences and produce the first piece of energy legislation in four years, one that President Bush hopes to sign as early as August.

Crude oil imports have doubled over the last three decades, and now account for nearly two-thirds of the oil Americans burn. Before the 1973 oil embargo, imports accounted for only about one-third of America's energy consumption. In the same three-decade period, oil demand in the United States has grown by 18 percent while domestic production has continued on a slow and probably irrevocable path of decline.

The problem is not the latest price rise, which, adjusted for inflation, is still well below the peak in early 1981, when oil cost the equivalent of $86 a barrel in today's dollars; gasoline, released from price controls, briefly sold back then for the equivalent of $3 a gallon. And it is not just imports; even if the country produced enough oil to meet its domestic needs, in a global economy a price shock would still be felt in the United States.

The fundamental problem, experts say, is that Americans depend almost exclusively on relatively large and heavy private vehicles, virtually all of them running on gasoline, for crucial daily tasks like getting to work and taking their children to school. "Americans live in a car-driven culture where they want to do as much as possible as fast as possible," said Amy Myers Jaffe, the associate director of Rice University's energy program in Houston. "I can drop off my dry cleaning, pick up my prescription drugs, do my banking and buy my lunch, all without leaving my car."

Because of this high dependence on private cars, the United States continues to use oil considerably less efficiently than any other rich industrial country. Yet most of the proposed policy remedies are meant only to subsidize the production of oil, not use less of it. Many of the rest are focused on electricity, little of it produced by oil.

Despite the lessons of the past, the United States remains particularly vulnerable to a decision by a crucial supplier - for example, the anti-American government of Venezuela -to cut its oil exports, as Saudi Arabia and other Arab nations did in 1973.

Even more critically, Americans can no longer count on abundant supplies of cheap fossil fuels, because developing nations like China and India are emerging as major competitors for resources. This is occurring just as global oil production may be hitting a plateau, a growing number of specialists say. Worldwide output, now about 80 million barrels a day, may fall short of the 100 million barrels a day that energy officials are counting on reaching within the next decade, they say.

Oil prices fell after previous shocks because recessions reduced demand. This time around, galloping consumption has left many authorities believing that the world may face a long period of high prices and tight supplies.

So who is responsible for the current situation? The evidence shows that consumers, oil suppliers, lobbyists and politicians all have played roles.

"A message of the late 1970's is we must prepare for the day of reckoning, the transition away from oil," said Mr. Schlesinger, who also served under President Richard M. Nixon as defense secretary and director of the Central Intelligence Agency.

But it did not happen then, he said, and "I doubt we're going to do it now."

THE CONSUMERS

What Has 4 Wheels and Guzzles Gasoline?

The failure to control consumption is most glaring in the country's transportation sector, which now represents two-thirds of all oil demand in the United States and is solely accountable for the growth of the nation's oil thirst over the last three decades. Each day, America's fleet of more than 200 million cars guzzles 11 percent of the world's daily oil output. Gasoline consumption has risen 35 percent since 1973, compared with a 19 percent increase in overall crude oil consumption.

The growth comes mainly from light trucks, including sport utility vehicles, which account for almost half of all cars sold in the United States. For many consumers, the advantages of an S.U.V. - size, power and an increased sense of security from driving a taller vehicle - largely overshadow one of their main drawbacks, higher fuel consumption.

"Don't blame S.U.V. drivers," said Mr. Nedzel, the 4Runner owner. "The marketplace has changed since the 1970's, and carmakers have adapted and people's habits have changed. For me, there isn't a hybrid that would get me where I want to go."

And while he says he would be willing to tolerate higher gasoline taxes, Mr. Nedzel opposes more stringent fuel efficiency standards. "That's like having an obesity problem," he said, "and being told you need a smaller shirt."

THE INDUSTRY

Supply and Demand Isn't What It Used to Be

On a warm, sunny day in February, David J. O'Reilly, one of America's top oil executives, stood before 200 energy leaders, analysts and bankers in Houston to lay out what he considered the world's new energy quandary.

"The most visible element of this new equation," said Mr. O'Reilly, the chief executive of Chevron, "is that relative to demand, oil is no longer in plentiful supply. The time when we could count on cheap oil and even cheaper natural gas is clearly ending."

That's a challenge the oil industry is struggling to meet. Major oil companies are fast running out of places to invest for new supplies of oil since most of the world's reserves are in countries that are either wary of foreign investors or, because of war or sanctions, shut off to American oil concerns.

At the same time, the oil industry is waking up to the growing challenge of Asian rivals who are seeking to secure access to their own reserves around the world. Mr. O'Reilly experienced this aggressive new stance first-hand recently: the China National Offshore Oil Corporation is seeking to buy Unocal with an unsolicited $18.5 billion bid and thwart his own offer.

"The main question is access to resources," said Daniel Yergin, chairman of Cambridge Energy Research Associates, an industry consulting firm. "It's the dominant issue that hangs over the entire industry, whether you're talking about Russia, the Middle East, or off the shores of the United States."

In contrast to previous oil shocks, which were caused by unexpected limitations on supply, today's sharp rise in oil prices is almost entirely driven by increased demand, not just from the United States but also from China, India and elsewhere.

According to Mr. O'Reilly, it took 125 years to consume a trillion barrels of oil; the next trillion is likely to be consumed in just 35 years.

To many in the industry, the only realistic alternative is to expand the search for oil, even to areas that are currently closed to drilling, including the ocean off the coasts of California and Florida and the coastal plain of the Arctic National Wildlife Preserve in Alaska.

"We're a spoiled nation," said James T. Hackett, the president and chief executive of the Anadarko Petroleum Corporation and a vocal advocate for increased domestic production. "Because this is such an important national issue, you shouldn't allow yourself to get into a crisis before acting."

But many outside the industry say that intensive exploration of the United States over more than a century has found almost all the oil there is to find, so reversing the decline in domestic production through new discoveries will prove impossible. There is also some doubt about whether oil producers can increase world output enough to keep up with the expected growth in demand.

"Oil supplies will diminish, that's geology," said Kenneth S. Deffeyes, a professor emeritus of geology at Princeton University and the author of "Beyond Oil: The View From Hubbert's Peak" (Hill & Wang, 2005). Professor Deffeyes predicts that global oil production will reach its peak around Thanksgiving Day and decline after that. "The negligence comes from doing nothing about alternative fuels or conservation measures over the past 20 years. Now it is too late. The oil is gone."

After previous disruptions, as when the Organization of the Petroleum Exporting Countries took control of their oil resources from foreign oil companies like Chevron in the late 1960's and early 1970's, those companies managed to rebound when high oil prices let them develop high-cost regions like the north slope of Alaska and the North Sea. But the price collapse of the 1980's led to nearly two decades of oil oversupply that discouraged additional investments.

In recent years, oil executives say they have made discoveries in Angola, Nigeria, Libya, Kazakhstan and Algeria, to name a few countries. The industry hope is that increased exploration and more intensive efforts at existing oil fields will enable producers to expand output enough to keep up demand, preventing prices from soaring and sustaining economic growth around the world.

"There's still plenty of room to play here," Mr. O'Reilly said in an interview in Houston after his speech. "In the last decade, there's been more opening than closing. The pendulum swings in this business."

THE POLITICS

Ambitious Proposals Stuck in the Beltway

When Bill Clinton was campaigning in New Hampshire in early 1992, the cost of oil was very much on voters' minds. The economy was weak and the third energy scare of the late 20th century - Saddam Hussein's invasion of Kuwait in 1990, which shut down nearly 3.4 million barrels a day of crude oil output for nearly a year - was still a powerful memory. The last of the Kuwaiti wells set aflame by the retreating Iraqis had been put out only a few months earlier.

But by the time President Clinton took office in January 1993, the price of crude oil was much lower and falling.

Passing an energy bill was not on the administration's agenda, but putting one into practice was. Congress had approved an ambitious law in 1992 intended to promote alternatives to gasoline. The goal was for 10 percent of the vehicle fleet to be capable of running on something else by 2000; by 2010 it was supposed to be 30 percent.

Today, the number is still under 1 percent.

"We did the best we could under the circumstances," Mr. Clinton said in a recent interview, "but there was minimal interest, the economy was growing like crazy, there was no inflation and oil was cheap."

By 1994, the price of crude oil bottomed out at less than $16 a barrel, making it impossible to save money by switching to something else. Low gasoline prices, combined with a rapidly improving economy, brought an explosion in the number of vehicles, to nearly one per driver. Many more of the new vehicles were S.U.V.'s, pickup trucks and minivans, all gulping fuel.

As part of his deficit-reduction program, Mr. Clinton managed to push through an increase in the federal excise tax on gasoline to 18.4 cents a gallon, from 14.1 cents. But he had to abandon a much more ambitious proposal to raise energy taxes across the board as part of an effort to limit global warming and control pollution from fossil fuels.

"I hadn't run on it, and hadn't made any kind of foundation to do anything on it," Mr. Clinton said. "It was sprung on Congress," he added, sounding regretful.

Despite the retreat on energy taxes, the vote on the budget bill was still so close in the Senate that Vice President Al Gore had to cast the deciding vote. There was never any chance of achieving anything close to the taxes levied in Europe, where consumers pay up to $5 a gallon for gasoline, mostly due to taxes.

"In Europe, people are less dependent on cars, they use smaller cars, and a gas tax wasn't as controversial as it would be here," Mr. Clinton said.

The atmosphere for cutting oil consumption might be better now, he said, than it was during his tenure. "There is a lot greater awareness, even though we're moving away from 9/11, of our vulnerability," he said. "We've got to get a vehicle fleet that doesn't depend on oil as much."

But given political constraints, which block any serious effort at fuel efficiency or raising energy taxes, the government is stymied, according to Philip R. Sharp, a veteran of Washington's energy wars and an Indiana Democrat who served in Congress from 1975 to 1995.

"We cannot in any rapid fashion or cheap fashion have a radical impact," said Mr. Sharp, who drafted large parts of the 1992 energy bill that sought to wean the nation away from gasoline. "It is very hard for public policy makers to grasp how large this marketplace is. It's gigantic."

2 Comments:

I remember Clinton catching major lead for the puny 4 cent a gallon tax increase. It almost killed his balanced budget bill which also passed by only one vote.

However, if Peak Oil is reached this year expect the Right-Wing to scapecoat Clinton. That's BullShit!!! Remember that the Congress had a office of technology and science accessment. This office gathered the best scientific research available and adviced Congress on possible policy recommendations. Largely because it recommended much higher gas taxes and conservation to prevent future energy crises and global warming, Newt Gingrich had it shut down when the Republicans gained control of the Congress in 1994.

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